Incremental budgeting is a part of the rolling forecast system. If there is a sudden spike in revenue, for example, it may make sense to do an incremental budget to take into account the new variable.
-down budgeting means that the CEO or CFO dictates how much money is present, and allocates it to each department. This has the benefit of control of expenditures, but the drawback that the department managers feel no responsibility to hew to a budget in which they had little or no input.
A s-up: This method starts at the department level and builds to an overall picture. While each department may want to have its needs fulfilled, there needs to be a subsequent tops-down evaluation in order to adequately distribute resources; also, only the tops-down analysis can compare the relative value of investments in various departments.
8. Explain in detail why it is difficult for investors to consistently beat the market" and earn returns in excess of that required given the level of risk taken.
Over the short-term, it is impossible, on average, for the investor to beat the market consistently.
That is because most information is generally distributed (in an open and liquid market), and any special information is disseminated fairly quickly (Malkiel, 1996). If one looks at the performance of investment professionals in mutual funds, for example, one finds that their average performance is slightly worse than the broad averages, such as the S&P 500.
It is possible to beat the market if one takes a long-enough view. That is because, through gathering specific information in certain fields, one can amass enough information to do well. This has proven especially true in the "alternative assets" market for universities, hospital endowments and family trusts (Economist, 2007).
9. How can the security market line be used to estimate required returns for securities? Explain your rationale in detail.
The security market line relates the additional return on assets (securities) to the slope of the regression in a given market basket of assets. The security line refers to all assets, rather than best-in-class or specific assets. Thus, if one wants to compare returns...
If one is comparing bond returns, one would use a similar bond index which is broad-based and reflects moves within the market.
The other adjustment which might be made for securities is a risk-adjusted return, using beta as an indicator of risk relative to market. Higher-beta stocks must have a higher return compared to the asset class used for comparison.
10. Explain the details of establishing a cash flow schedule. Be sure to define all terms used when establishing such a schedule.
A cash flow schedule is composed of the following:
Sources of cash flow:
Net income (from the Income Statement)
Equity investment: increase in stock purchases, endowment increases
Debt increase: short or long-term debt
Accounts Payable Increase: increases in the days payables outstanding or total payables
Depreciation
Amortization
Uses of cash flow:
Capital expenditures
Increase in Accounts Receivable; either due to increase in days revenue outstanding or total revenues with the same DSO
Increase in Inventory
Pay-down of debt instruments (principal, as the interest is in the Income Statement)
Bibliography
Economist. (2007, January 18). The Ivory Trade. Economist, p. n.p.
Fleisher, C.S. (1991). Using an Agency-Based Approach to Analyze Collaborative Federated Interorganizational Relationships. Journal of Applied Behavioral Science, 116-130.
Malkiel, B. (1996). A Random Walk Down Wall Street. New York: WW Norton.
Robinson, J.C. (1997). Physician-Hospital Integration and the Economic Theory of the Firm. Medical Care Research and Review, 3-24.
Shonkwiler, J. a. (1984). The Implications of Estimating Market Demand Curves by Least Squares Regression. European Review of Agricultural Economics, 107-118.
Healthcare Financial Management
